Poor Math Skills Lead To Foreclosure ?

A new study purports to argue that people with poor math skills are more likely end having their homes foreclosed upon:

IF you can’t divide 300 by 2, should you qualify for a loan?

That is one of the questions raised by a new study led by a Columbia University assistant business professor, Stephan Meier, who found that borrowers with poor math skills were three times more likely than others to go into foreclosure.

Mr. Meier conceded that the results were not shocking, but he said he had not expected the connection between math skills and mortgage default to be so pronounced.

About 340 borrowers in Connecticut, Massachusetts and Rhode Island who took out subprime loans in 2006 and 2007 were surveyed in 2008. None were in foreclosure.

The respondents were asked five questions, with the first requiring borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000. (Since the survey was conducted by telephone, the questioners did not know who was using a calculator.)

About 16 percent of the respondents answered at least one of the first two questions incorrectly. Mr. Meier said that the results were consistent among all levels of education and income.

Over all, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter.

Mr. Meier said the fact that the borrowers in the sample had subprime loans — which in 2006 and 2007 were given even to those with dismal financial histories — did not lessen the significance of the findings. A larger survey in Britain, he said, found nearly the same levels of math illiteracy among those questioned about retirement savings.

Mr. Meier said the study had at least two implications for mortgage lenders. “Maybe start adding math tests to the process,” he said, “and screen them away.”

Now, pardon me while I point out at least three flaws with Mr. Meier’s study:

  1. It falls into the correlation/causation fallacy. The fact that people with poor math skills are more likely to default on their mortgages isn’t all that surprising once you consider the fact that people with poor math skills are also likely to be poorly educated in general, that poorly educated people are likely to have lower incomes, and that people with lower incomes are more likely to fall behind on their mortgages. Making the logical leap from “poor math skills” to foreclosure
  2. Meier’s decision to discount the fact that people in his survey had subprime loans seems to be a huge flaw. It’s exactly these types of people who are living on the financial edge to begin with, so it makes sense that they’d be more likely to default on their loans.
  3. Meier’s methodology is questionable. To be honest, if someone called me on the phone and asked me to do even the simple math that was included in this survey, I’d likely be a little put-off come up with a quick answer unless I had a pad of paper or a calculator next to me. Actually, I’d probably be likely to hang up on them.

What Meier’s study does point out, of course, is the need for more education about basic finance and what might be called real “home economics” in school, but that’s another story.

FILED UNDER: Economics and Business, Public Opinion Polls, Quick Takes
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. john personna says:

    Those are your best three points? Really?

    In “1” you seriously say “The fact that people with poor math skills are more likely to default on their mortgages isn’t all that surprising once you consider the fact that people with poor math skills are also likely to be poorly educated in general,” That isn’t a refutation, that is a reinforcement.

    “2” is ill-informed. In 2006-2007 loan brokers were trying to slam everyone into sub-prime loans. At times they didn’t even inform them of the conventional loans for which they qualified. Why? Because the sub-prime loans carried larger commissions for the loan broker. Realtors were often part to this, guiding buyers to “their loan guy” who made his money on commission. Incentives matter.

    On “3” I think the methodology is good enough for broad strokes.

    And in broad strokes it raises questions of real political philosophy: To what extent is our worldview based on a citizenry with full competence? To what extent do we acknowledge bounded rationality? And in a bounded world, what should we do for those who have real difficulty in understanding if a loan is good for them, or good for their loan agent?

  2. Your point on “1” refutes the argument of the survey that lenders should consider math tests as part of the mortgage application process.

    Your point on “2” does not address my point, which is the fact that sub-prime loans have higher default rates generally. Meier’s failure to recognize that fact makes his study flawed and irrelevant.

    As for “3” give me your number and I’ll call you with a pop quiz sometime around 3am

  3. john personna says:

    I took “IF you can’t divide 300 by 2, should you qualify for a loan?” to be rhetorical. I don’t think anyone, seriously, wants to live in a world with math tests (administered by whom?) attached to loans.

    This should be a discussion of rationality, bounded rationality, and what you do about it.

    I believe other countries approach this by regulating the complexity of loans, and their presentation. This discussion applies to credit agreements as well, and how they exploded from 1 page to 30 pages. People like Elizabeth Warren don’t want to give people tests, but they do want to make things easier for them to understand.

    So on “2” where are you still trying to go? Are you trying to ignore this big dynamic in society of complex instruments sold to people who can’t understand them?

    On “3”, I don’t try to say too much about myself usually, but since I have my old GRE score in my desk here by my knee .. I see that my quantitative score was at the 90% percentile. That’s of folks considering post-grad education. I’m sure I’ve lost some since then … but I seem to have avoided the sub-prime loans, the onerous credit card balances.

  4. john personna says:

    BTW, I think the wikipedia page on bounded rationality is pretty good:

    http://en.wikipedia.org/wiki/Bounded_rationality

    I think we are all bounded one way or the other. Nobody gets off the hook. And so political philosophies reliant on more perfect individuals are themselves flawed.

  5. drew says:

    “To be honest, if someone called me on the phone and asked me to do even the simple math that was included in this survey, I’d likely be a little put-off come up with a quick answer unless I had a pad of paper or a calculator next to me.”

    Really? Ouch

    ” Actually, I’d probably be likely to hang up on them.”

    Now THAT I understand.

    I’ve always been a curmudgeon on this topic. On the one hand we have those who think these folks are entitled to home ownership and the government should facilitate it and subsidize it, but then they blame evil brokers and bankers when these folks are incapable of dealing with the attendant issues.

    Pick one. Either they are capable of entering into and honoring legal contracts………or they are not.